Boeing 2006 Annual Report Download - page 70

68 The Boeing Company and Subsidiaries
Notes to Consolidated Financial Statements
The following table provides additional information
regarding potentially convertible and converted or deferred
Performance Shares.
(Shares in thousands)
Grant Date 2/25/2002 2/24/2003 2/23/2004 2/28/2005
Expiration Date 2/25/2007 2/24/2008 2/23/2009 2/28/2010
Weighted Average
Grant Date Fair Value $44.94 $30.27 $43.53 $33.05
Cumulative Vested at
December 31, 2006 100%125%100%45%
Shares Convertible at
December 31, 2006 4,020
Shares Convertible at
December 31, 2005 5,625 5,991 7,347
Shares Converted or
Deferred During 2006 5,642 6,003 3,280
Shares Converted or
Deferred During 2005 5,688 4,855
Total Market Value of
Converted or Deferred
Share 2006 $461 $496 $276
Total Market Value of
Converted or Deferred
Share 2005 $351 $322
The above tables do not include the maximum number of
shares contingently issuable under the Plans. Additional shares
of 5,825,998 could be transferred in and converted or deferred
if Performance Share vestings exceed 100%. Additionally,
future deferred vestings that are eligible for the 25% matching
contribution could result in the issuance of an additional
1,809,888 shares.
For years ended December 31, 2006, 2005 and 2004, we
recorded $120, $124 and $57, respectively, of additional com-
pensation expense to accelerate the amortization of compensa-
tion cost for those Performance Shares converted to common
stock or deferred as stock or cash at the employees’ election.
As discussed above, Performance Shares granted in 2005
were measured on the date of grant using a Monte Carlo model.
Additionally, we began to remeasure certain Performance
Shares that have a cash settlement feature as liability awards
beginning September 30, 2005. Liability awards vesting and
transferred into deferred compensation plans totaled $98 and
$9 for the years ended December 31, 2006 and 2005. The key
assumptions used for valuing Performance Shares in 2006 and
2005 follow:
Weighted
Average Expected
Measurement Expected Dividend Risk Free Stock
Grant Year Date Volatility Yield Interest Rate Beta
2006 valuation assumptions
2002– 2005 12/31/2006 21.5%1.5%4.62-4.83%1.12
2005 valuation assumptions
2001– 2005 12/31/2005 23.0%1.6%4.38-4.43%0.98
2005 2/28/2005 27.8%1.9%4.00%1.03
Weighted average expected volatility is based on recent
volatility levels implied by actively traded option contracts on
our common stock and the historical volatility levels on our
common stock. Expected dividend yield is based on historical
dividend payments. Risk free interest rate reflects the yield on
the zero coupon U.S. Treasury based on the Performance
Shares’ remaining contractual term. Stock beta is a measure of
how our stock price moves relative to the market as a whole.
The fair value of the 2005 Performance Shares is amortized
over the expected term of each award. The expected term of
1 to 4 years for each award granted is derived from the output
of the valuation model and represents the median time required
to satisfy the conditions of the award, adjusted for the effect of
retiree eligible participants. Each price growth target has a dif-
ferent expected term, resulting in the range of values provided.
At December 31, 2006, there was $134 of unrecognized
compensation cost related to the Performance Share plan
which is expected to be recognized over a weighted average
period of 1.3 years. In connection with Performance Shares
that have not met the market conditions, we reclassified $288
from Additional paid-in capital to Other liabilities and recognized
a cumulative adjustment to General and administrative expense
of $88 during 2005. Additionally, effective December 31, 2005,
we modified our deferred stock compensation plan to require
all Performance Shares that were unvested and deferred as
stock units to be settled in stock. We also gave participants in
our deferred stock compensation plan a one-time opportunity
to cancel their deferral election for unvested Performance
Shares or to change their deferral election for unvested
Performance Shares to a deferred interest account. As a result,
we reclassified $213 from Other liabilities to Additional paid-in
capital at December 31, 2005, for unvested Performance
Shares deferred as stock units and for unvested Performance
Shares no longer being deferred. These modifications resulted
in no incremental compensation cost. For participants who had
deferred unvested Performance Shares in stock units and can-
celled or changed their deferral election effective December 31,
2005, we reversed $13 of previously recorded compensation
expense related to the 25% matching contribution which was
forfeited. 268 employees were affected by the modification.
Stock Options
Options have been granted with an exercise price equal to
the fair market value of our stock on the date of grant and
expire ten years after the date of grant. For stock options
issued prior to 2006, vesting is generally over a five-year service
period with portions of a grant becoming exercisable at one
year, three years and five years after the date of grant. In the
event an employee has a termination of employment due to
retirement, layoff, disability or death, the employee (or benefici-
ary) immediately vests in grants that have been outstanding
for at least one year.
On February 27, 2006 we granted to our executives 6,361,100
options with an exercise price equal to the fair market value of
our stock on the date of grant. The stock options vest over a
period of three years, with 34% vesting after the first year, 33%